Home Depot Hurting

ATLANTA -- It's been 4½ years since former Home Depot Chief Executive Bob Nardelli's bold prediction that the home improvement retailer could sustain "unlimited growth" without significantly affecting sales at established stores.

That statement was made during much better economic times.

The Atlanta-based company, under different leadership, a different growth philosophy and amid an ailing housing market, put the brakes Thursday on some of its future expansion plans and said it would do what previously was unthinkable -- close 15 of its underperforming flagship stores.

It is the first time the world's largest home improvement store chain has closed a flagship store for performance reasons. The move, to be completed within the next two months, will affect 1,300 employees.

The company reiterated its intention to open 55 new stores in the 2009 fiscal year, though it no longer will pursue the opening of about 50 U.S. stores that have been in its new store pipeline, in some cases for more than 10 years.

"By building fewer stores, in the best locations, and making sure our existing stores are profitable, our company will be in a much stronger competitive position," said CEO Frank Blake, who took over from Nardelli in January 2007.

Home Depot shares rose $1.07, or 3.7 percent, to close at $29.87.

Nardelli, chief at automaker Chrysler LLC, had other ideas on Nov. 18, 2003, when he said that Home Depot's robust new store growth would continue unabated and suggested that the retailer might one day expand into Europe and Asia.

The company has added about 600 stores since then but has scaled back new store growth in the past few years. Its only stores outside North America are a dozen in China, and those were obtained through an acquisition.

Some analysts and large investors have worried in the past that as Home Depot gets bigger, it would invariably put stores in direct competition with existing stores, a practice known in the industry as cannibalization.

Home Depot has justified cannibalization by saying it increases the company's overall market share.

On Thursday, Blake said Home Depot's goal now is to "reduce cannibalization and drive higher returns."

On Sept. 21, Blake said that the company had no plans to make any broad-based job cuts or reduce the number of its core retail stores in the face of a persistent housing slump that wasn't expected to improve anytime soon.

But since then, the economy and housing market woes have grown worse, and Home Depot has announced several rounds of job cuts.

In December, Home Depot said it would cut 950 jobs and close three call centers that handle orders for home installation. The next month, Home Depot said it would cut 500 jobs at its headquarters.

Home Depot has sought during the past year to focus more attention on its core stores. In August, it sold its wholesale distribution business, HD Supply, to a group of private equity firms for $8.5 billion.

Home Depot said Thursday that it plans to close three stores in Wisconsin, two in Ohio, two in New Jersey, two in Indiana and one each in Kentucky, Louisiana, Minnesota, North Dakota, New York and Vermont.

A company spokesman said some of the affected employees will be relocated, while others could lose their jobs.

Spokesman Ron DeFeo said Home Depot previously has closed only one of its flagship stores, and that because of structural damage. Last year, Home Depot closed its 11 Landscape Supply stores. It also has shut a number of its Expo design centers.

Because of the store closings announced Thursday, Home Depot will record a charge of about $186 million, including inventory markdowns of $11 million and severance of $8 million. It also will record a charge of about $400 million related to development costs and ongoing obligations associated with the future store locations that it is scrapping.

New store capital spending will be reduced by $1 billion during the next three years, Home Depot said.

Excluding charges, the company reiterated that its diluted earnings per share from continuing operations are expected to decline by 19 percent for fiscal 2008. Home Depot releases its first-quarter results May 20.

Home Depot operates 2,258 stores in the United States, Canada, Mexico and China.

This story was originally published May 3, 2008 at 2:56 AM with the headline "Home Depot Hurting."